Business loans, as the term indicates, refer to the loans acquired for establishing, running or enhancing one’s business. The dictionary meaning is simply, bank loan granted for the use of business. There are various types of loans which come under the umbrella of business loans. These loans have to be carefully planned and thus, those who want to apply for it should formulate a clear business plan.
A business loan is drawn either for the expansion, start up or enhancement of a business. The process of acquiring business loans can be very tedious. It can also have some tricky conditions and limitations. To avoid that, all those who wish to apply for a loan, must have a concrete business plan.
Getting a business loan is difficult. But, if one follows the three Cs of credit, then it would be a smooth process. The three Cs are Character, Credit and Collateral.
Character pertains to your integrity and your credit worthiness as a person. The banker usually checks whether you have any criminal record. The banker may also scrutinize your accountability to the community through your family ties, home ownership and duration of residing at a particular place.
The banker would also check your credit history. In some instances, the banker can excuse a late credit card payment. But, if the applicant is under heavy debt or mortgage, and has skipped the payments, then it can create problems.
The last, but not the least is Collateral. The bankers favor good credit as well as clean character. However, the factor that creates better chances of getting through the loan procedure, is the holding of some kind of asset by the applicant, that means it could be anything from trucks to machines to buildings or any other equipment. Basically, the collateral is the solid property or instrumentation which could get a good price, even if the business fails. Collateral is a major point of consideration for the bankers.
Common Business Loans
In secured loans, the borrower promises his assets as collateral against the loan. In return, the creditor grants the loan. The assets he or she pledges, then become a ‘secured loan’ or ‘secured debt’. In case of a default, the creditor gets the possession of the collateral. As a result, the creditor can recover or regain the amount of the money loaned by selling the collateral.
Types of Secured Loans
- Mortgage Loans: Mortgage loans are taken against a collateral, which is the applicant’s property, for instance, a house.
- Non-recourse loan: It is a secured loan wherein the only security or claim the creditor has against the borrower is the collateral. It is known as a non-recourse loan because, here, the creditor has no option or provision against the borrower other than the collateral, in case of a failure in payment by the borrower. However, this is only after ‘foreclosure’ by the borrower.
- Foreclosure: This is where the mortgaged property is sold by the defaulting borrower to repay his debt to the creditor. This is an entirely legal procedure.
Unsecured loans are the exact opposite of secured ones. It is a kind of a loan or debt, which is not supported by a collateral. It is difficult to get an unsecured loan; however, it is cheaper at the same time. Here, the credit rating of the business matters. It is basically an assessment of the repayment capabilities of the business.
These are very basic loans, where the loan is applied for a new business venture. Meticulous planning is advisable, before applying for a start-up loan. Here, the credit and collateral can have a deep impact.
Business Only Loans
These loans are availed only for business sans the usage of personal credit, till the time the business is capable of returning the amount payable.
Business Acquisition Loans
If a company wants to go through a takeover process, or wants a loan to acquire another business, there are loans to complete that procedure. These are acquisitions financed through debt. Such acquisitions are called ‘leveraged buyouts’. This is very common, even if in many instances, the company has enough finances to carry out the takeover or the acquisition. Apart from these, there are professional loans, where loans are applied by a professional from a specific field. For example, loans availed by doctors or lawyers and so on.
On the whole, obtaining loans can be a very cumbersome and lengthy process. But with increasing popularity, loans, be it a business loan, a home loan or a personal loan, are the order of the day.